E-commerce cos will now find it difficult to offer discounts and cashbacks

The new guidelines for ecommerce companies that have received foreign investment will make it difficult for them to offer discounts and cashbacks to online shoppers, experts said, and will have ripple effects on their logistics and promotion services.

Companies have been able to offer discounted products because of the way their own entities and business-to-business arms (B2B) have been structured.

The guidelines will affect business models where manufacturers would usually send their stock to the B2B wholesale arms, which would then sell them to select vendors on the platform at discounted prices. The new Press Note says that ecommerce marketplace entities cannot exercise ownership or control over inventory.

“While this helps clarify how the regulator perceives inventory control, this will impact companies which adopt a structure where a wholesale entity sells to the vendors on the platform, often helping in pricing as well,” said Archana Tewary, partner at J Sagar Associates.

The guidelines state that a vendor’s inventory will be considered to be controlled by an ecommerce marketplace if it makes more than 25% of its purchases from the marketplace entity or its group companies.

“The clarity on the 25% rule is to be noted since this can have an impact on the degree of discounts during large sales as well as on customer experience,” said Sreedhar Prasad, an ecommerce industry expert and partner at Kalaari Capital.

The impact on discounting will come to the fore especially during sales on Flipkart and Amazon, experts said.

Cashbacks will also become expensive to execute for platforms, especially in terms of providing logistics and wallet services since they have to be made equally available to all vendors.

The guidelines state that cashbacks provided by group companies of the ecommerce entity should be fair and non-discriminatory, adding that providing a service to any vendor in terms of cashbacks should be made available to other vendors in similar circumstances.

“Customers are going to suffer as they will not get the pricing that they have been getting. Customer service is also going to suffer because sellers are not equipped to operate at the scale,” said Satish Meena, a forecast analyst at Forrester.

Smaller sellers on online platforms, which have been contesting the preferential treatment meted out by Flipkart and Amazon to its entities, have reason to cheer. Any service on an ecommerce platform – logistics, warehousing or easy financing options – will now have to be offered to all sellers and not to only preferred sellers. Ecommerce companies cannot charge additional prices from third-party sellers for these services.

Even for private labels, etailers may not be able to advertise or promote their own brands while charging third-party sellers for pushing them.

“The noise around this started to amplify post the Flipkart-Walmart deal. There was a feeling that small and medium-sized sellers and traders were hurt and were crowded out on the big ecommerce sites,” said an executive with an online retail company who did not want to be identified.

Policy makers believe that despite drafting the regulations announced through Press Note 3, they were being circumvented. The implementation of the new guidelines also remains to be seen, most people said.